Forbidden Fruit

I received a lot of emails from subscribers as to whether Apple should be purchased into Wednesday's downturn.

My answer was no.

The stock market is not always right. In the case of Apple, it might even be underreacting!

Investors were disappointed that the new iPhone is not different, the price point is too high and that the China event was a dud.

The stock market may have not figured out how bad the loss of share is (with the bullish Wall Street analysts still talking about margins holding up) and how much of a strategic blunder Tuesday's release was.

What is being ignored is that not only are Apple's profit margins substantially above any of its peers but the company's price-to-sales ratio is astronomical relative to its competition and absolutely high (given that it still is a hardware business).

While Apple's competition grows much stronger, the company is getting to the point where the franchise is being jeopardized by slipping so much in market share.

If you think my view is moderately insane, the same thing happened in the personal computer space three decades ago -- the industry went from equal footing to nothing as Microsoft ( MSFT) became the standard.

The stock market understands the value of market share.

Why do growth companies such as Amazon ( AMZN), Salesforce.com ( CRM) and numerous others get such high multiples? Because Mr. Market wants them to grow and get share as much as possible now, earn the money later.

The value of the share is tremendously important.

If you sell diamonds or have a monopoly, worry about price. In industries such as Apple's, worry about share.

Bottom Line

Tuesday's announcements were disappointing, and Apple remains a value trap -- a view I have had throughout most of the past 12 months, since my bear case for Apple written back in September 2012.

The share price drop from $700 to below $400 has attracted value investors like Carl Ichan, but even Carl Icahn makes mistakes.

I expect Apple's shares to trend lower, as consensus estimates (which had incorporated significant emerging market demand for the company's products) are still far too optimistic and will likely be reduced in the months ahead.
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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